US yields and the dollar are still reacting to a blowout average hourly earnings print from Washington Friday, while SEK is in focus as the Sunday election showed less of a political rebellion afoot than many had forecasted.
Article / 06 January 2015 at 8:11 GMT

FX Update: Are dollar bulls beginning to tire?

Head of FX Strategy / Saxo Bank
  • European currencies remain weak amidst deep correction
  • Excluding USDJPY, many USD pairs appear overextended
  • 118.5 currently a key support level for USDJPY

By John J Hardy

The market environment has taken an odd turn to start the year, as European currencies remain very soft despite very weak risk appetite, which seemed to be incompatible with the action in the latter half of last year, when it seemed the US dollar and pairs like EURUSD were rather sensitive to risk appetite

This sensitivity was demonstrated by the USD advance halted in October during the brief meltdown in world asset markets and a similar pause in the USD rally amid a shallower correction in risk appetite in December. 

Now we have a fairly deep correction and the European currencies remain weak. Meanwhile, the JPY has been more consistent and continues to trade in negative correlation with risk appetite.


As the Japanese trading day winds down, the USD appears to be fairly weak 
against a resurgent yen. Photo: iStock

This means that the likes of EURJPY and GBPJPY have been hit the hardest, though the shine has come off the greenback since yesterday and the USDJPY correction picked up pace overnight, trading up against the key support just below 119.00 in Asia.  

The message for today: it looks like a possible pivot day for the USD outlook — either we get a recovery or signs that the greenback will continue to trade weakly in the near term. The USD view at the moment is oddly bifurcated — still strong against Europe but weak against Asia .

G-10 rundown

USD: Caution, particularly in USDJPY as long as we have a freefall in risk appetite — outside of USDJPY, many of the USD pairs look overextended and could consolidate, particularly if data for the rest of the week are not supportive and don’t provide needed fundamental momentum to get the USD rally back on track.

EUR: Has gone sideways since big drop to kick off 2015 — surprised at the lack of resilience, given weak risk appetite — 1.2000 in EURUSD is the key upside resistance and the chart does look remarkably extended.

JPY: Powering higher in its old pattern of finding strength on weak risk appetite as carry traders pull in their horns.

GBP: Suffering a bit as GBP tends to be a pro-cyclical trade – last bits of local resistance coming into view in EURGBP which risks a bigger rally back into the range if the pair breaks well above 0.7850.

CHF: Jordan interview late yesterday brought nothing new to the table and weak risk appetite is generally CHF supportive anyway.

AUD: A bit of momentum divergence after a sharp rejection of the attempt at breaking the 2010 lows suggest risk of consolidation if bad market nerves continue and/or we get weak US data.

CAD: Found support ahead of 1.1725 and may stay well supported even with risk off as oil prices have renewed their downward slide.

NZD: Unfairly bid against US dollar — if risk appetite really heads south, NZD is the last place traders will want to be.

SEK: Not giving any clues — waiting for data risks and long wait until next Riksbank meetings. EURSEK has a long history of waiting around for event risks.

NOK: Remains supported on oil price developments — upside could extend.


118.85 is a key support level in USDJPY, and late Asia saw the market toying with this level earlier this morning. A break could open up for the next retracement level at 117.58 and even a test toward that 115.56 area from December if we head into a full blown risk-off mode. 

If we see a smar recovery back toward 120, meanwhile, it will encourage the view back higher for a test of the top. Either way, it feels like a pivot day for the USD and USDJPY.

Source: Saxo Bank 

Looking ahead

It’s world Service Purchasing Managers Index day today (with Sweden out of sync this month as it reports tomorrow), as we watch Europe for the latest survey readings this morning. The market hardly reacted yesterday to a weaker than expected German CPI figure which showed inflation running at a mere plus 0.2% headline rate. 

And Germany has had one of the higher inflation levels in the Eurozone. Mario Draghi and company will have their work cut out for them at the Jan 22 meeting.

Later today the focus shifts to the UK Services PMI as EURGBP nears its last gasp resistance area around 0.7850. The November reading was 58.6, so the bar is rather high there for an upside surprise.

The US ISM non-manufacturing reading is the calendar highlight of the day, and the current market mood is not going to take kindly to any weak surprises. It’s interesting to note the weak November reading in the Markit US Services PMI survey in recent months relative to the strong reading in the ISM non-manufacturing data. 

These two surveys have been relatively tightly correlated since the inception of the Markit survey in early 2012. The preliminary Dec. Markit reading showed a further weakening.

Economic Data Highlights

  • Australia Nov. Trade Balance out at minus 925M vs. minus 1600M expected and minus 877M in Oct. 
  • Japan Dec. Japan Services PMI out at 51.7 vs. 50.6 in Nov. 
  • China Dec. HSBC Services PMI out at 53.4 vs. 53.0 in Nov. 

Upcoming Economic Calendar Highlights (all times GMT)

  • Norway Dec. Manufacturing PMI (0800) 
  • Spain Dec. Services PMI (0815) 
  • Italy Dec. Markit/ADACI Services PMI (0845) 
  • France Dec. Final Markit Services PMI (0850) 
  • Germany Dec. Final Markit Services PMI (0855) 
  • Euro Zone Dec. Final Markit Services PMI (0900) 
  • UK Dec. Markit/CIPS Services PMI (0930) 
  • US Dec. Final Markit Services (1445) 
  • US Dec. ISM Non-manufacturing Survey (1500) 
  • Australia Dec. AiG Performance of Services Index (2230) 
-- Edited by Michael McKenna

John J Hardy is head of forex strategy at Saxo Bank. Follow John or comment below to engage with Saxo Bank's social trading platform.


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